Broadening the Demand Base

COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

Joey Roi Bondoc BROADENING THE DEMAND BASE Manager | Research | Philippines +632 858 9057 Traditional occupiers and offshore gaming further diversify Manila office market [email protected]

2018-21 Summary & Q2 2019 Full Year 2019 Annual Average Dom Fredrick Andaya Recommendations Director | Office Services | Philippines > Colliers sees traditional and offshore gaming +63 917 831 6725 The national government’s firms complementing the outsourcing firms’ [email protected] directive halting the approval of Demand office space absorption from 2019 to 2021. 229,500 sq m 849,100 sq m 1.0mn sq m Philippine Economic Zone Authority (PEZA) applications is likely to constrict the expansion of outsourcing firms. But we see the > We see the Bay Area, Ortigas Center, and dip in absorption being offset by Fort Bonifacio accounting for a combined take up from traditional occupiers* 54% of new supply from 2019 to 2021 as Supply developers respond to offshore gaming and and offshore gaming firms that are 190,000 sq m 1.03mn sq m 1.08mn sq m traditional occupants’ requirements. ineligible for fiscal incentives given to PEZA locators. We recommend that developers: Annual Average target traditional tenants; push for QQQ/ YOY/ Growth 2018–21/ End Q2 End 2019 End 2021 the speedy approval of pending PEZA applications; and monitor > Year-on-year 2019 rents should rise at about 6%, higher than our Q1 2019 forecast of 5%, proposed legislation that should +2.1% +6.0% +6.0% due to cost-sensitive occupants competing for result in more foreign companies Rent available PEZA space and a flight-to-quality occupying office space in the with firms transferring to newer buildings. PHP985 PHP1,000 PHP1,120 country’s capital. Meanwhile, outsourcing tenants > Colliers projects an annual vacancy of 6.1% -0.5pp +1.3pp +0.0pp should consider PEZA space outside from 2019 to 2021, slightly lower than our Manila such as those in Iloilo and forecast of 6.3% in Q1 2019 due to sustained Cebu while offshore gaming firms 4.9% 6.0% take up from offshore gaming, outsourcing Demand 6.1% should consider new towers in Vacancy and traditional tenants. Ortigas Center and its fringes. Source: Colliers International. Note: USD1 to PHP51 as of the end of Q2 2019. 1 sq m = 10.76 sq ft. The Philippine Economic Zone Authority is also known as PEZA. *Includes companies in various sectors including legal, engineering and construction, government agencies and flexible worksp ace operators. COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

RECOMMENDATIONS SUPPLY TO BREACH 14 MN SQ M Tap traditional and non-BPOs’ office demand In Q2 2019, Metro Manila’s office supply increased by about 190,000 sq metres (2.0 million sq feet) to 11.3 million sq metres (121 million sq feet). The national government has ordered a moratorium on the processing of PEZA Alabang accounted for 33% of new office space following the completion of applications in Metro Manila. We see this constricting the expansion plans of CTP Asean (23,300 sq metres or 250,700 sq feet) and Filinvest Axis Tower 2 outsourcing firms in the country’s capital. Hence, Colliers encourages (39,300 sqmetres or 422,900 sqfeet). Fort Bonifacio chipped in 60,100 sq developers to be mindful of the demand of non-outsourcing occupants as metres (646,700 sqfeet) with the delivery of Ecoprime(35,300 sqmetres or these companies are ineligible for tax incentives given to economic zone 379,800 sq feet) and Milestone at Fifth Avenue (24,800 sqmetres or locators. Developers should specifically watch out for the requirements of 266,800 sq feet). Meanwhile, the Bay Area’s stock grew by 43,600 sq metres insurance, financial technology (fintech), engineering, construction firms as (469,100 sqfeet) with the delivery of DoubleDragonCenter East, Met Live, well as flexible workspace operators. Philflex Building and Y Building. Developers with pending PEZA applications to push for Colliers sees Metro Manila’s leasable office stock reaching 14.2 million sq speedy approval metres (152 million sqfeet) in 2021. This is 29% higher than the metro’s stock of 10.9 million sqmetres (117 million sqfeet) at the end of 2018. Colliers encourages Manila-based developers with pending PEZA applications About 54% of the new supply from 2019 to 2021 is likely to be in Ortigas to push for immediate approval of their applications. This is important to Center, Fort Bonifacio and the Bay Area as developers respond to rising address the tight office supply in Metro Manila from 2019 to 2022 especially in demand from non-outsourcing and offshore gaming firms as well as Makati CBD and the Bay Area where vacancy is already sub-1%. companies transferring to newer buildings. Monitor shift in economic policies Colliers sees sustained office completions in Metro Manila from 2019 to 2021. We see this being complemented by new supply in sites outside The government’s proposal to ease foreign ownership restrictions in economic Manila such as Cebu, Iloilo, Clark, and Davao. These are the preferred sites sectors such as telecommunications, transportation, construction and retail due to the availability of skilled manpower and improving infrastructure. We should contribute to increased office space absorption. Colliers recommends expect the national government to expedite approval of PEZA applications in that developers closely monitor the status of these bills pending in Congress. these locations to support the government’s efforts in spurring economic Expansion outside Manila opportunities outside of the country’s capital. With the moratorium on PEZA applications in Metro Manila, Colliers sees cost- Vacancy At 6.1% By 2021 sensitive outsourcing firms scrambling for available PEZA-approved space. We encourage occupants to consider PEZA buildings outside Manila including Despite the completion of 190,000 sqmetres (2.0 million sqfeet) in Q2 those in Cebu, Iloilo, and Davao. 2019, Colliers recorded a lower vacancy of 4.9% from 5.4% in Q1 2019 following substantial absorption of office space in Quezon City and Ortigas Offshore gaming and non-outsourcing in Ortigas and Quezon City CBD and its fringes. Colliers now sees an annual vacancy of 6.1% from 2019 For offshore gaming tenants, Colliers encourages developers to explore newly- to 2021. This is equivalent to an annual supply of 1.08 million sq meters opened office spaces in Ortigas Center that accommodate offshore gaming (11.6 millionsqfeet) and yearly net absorption of about 1.0 million sq firms while cost-sensitive non-outsourcing tenants such as government metres (10.8 million sqfeet). agencies and start-ups operators should consider buildings in Quezon City that offer cheaper lease rates compared to Makati and Fort Bonifacio. 2 COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

New supply in the Bay Area, Ortigas Center, and Quezon City should be Meanwhile, traditional and non-outsourcing firms including those involved in tempered by demand from offshore gaming and traditional or non- the healthcare services, construction and engineering, food and beverage outsourcing occupants. We also see the tight vacancy in PEZA buildings (F&B), flexible workspace, and information technology sectors are marginally driving lease rates up from 2019 to 2021. continuously growing on the back of sustained macroeconomic growth. Deals with these firms reached 271,000 sq metres (2.9 million sqfeet) in H1 MetroManila office forecast, (sq m) 2019, about 22% higher than 222,000 sq metres (2.4 million sqfeet) closed in the same period in 2018. Among the firms that took up space during the Supply Net Take-up Vacancy 1,600,000 10% period include Siemens, Tenet Healthcare, Jollibee Foods Corporation, and 1,400,000 Common Ground. 8% 1,200,000 Metro Manila office transactions: 1,000,000 6% Gaming 800,000 H1 2018 23% 4% 600,000 H1 2019 37% 400,000 2% 200,000 KPO

- 0% H1 2018

2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2012 29% H1 2019 16%

Source: Colliers International Voice H1 2018 19% NON-BPOs FILL THE VOID H1 2019 10% Compared to the 361,000 sq metres (3.9 million sqfeet) of transactions closed in H1 2018, outsourcing deals reached 199,000 sqmetres (2.1 million Others sqfeet) in H1 2019, 45% lower YOY. Among the firms that occupied space in H1 2018 29% H1 2019 H1 2019 are AFNI Philippines, 24/7 Intouch, and IBEX Global Solutions. We 37%

attribute the dip in transactions to the slower approval of economic zone Source: Colliers International applications in Metro Manila and uncertainty regarding the approval of the second package of comprehensive tax reform program which intends to reduce corporate income tax rates but purge incentives given to foreign investors including outsourcing firms. RENTS CONTINUE TO RISE The demand from offshore gaming firms, meanwhile, has been relentless We project Metro Manila’s average rent rising by about 6% per year from with transactions reaching 274,000 sqmetres (2.9 million sqfeet) in H1 2019 to 2021, higher than our forecast of 5% in Q1 2019 due to tight supply 2019. Deals were closed in Alabang, Bay Area, Quezon City, Ortigas, Makati of PEZA-approved office space. We still see healthy rental growth in sub- CBD and its fringes in Q2 2019. Colliers sees take up from these firms locations such as the Bay Area as well as Makati CBD and its fringe areas due breaching 300,000 sq metres (3.2 million sqfeet) in 2019 especially with to offshore gaming operations and limited supply. We also see Ortigas new business hubs being more accommodating to offshore gaming Center rates catching up due to the turnover of new and high-quality office operations. space as well as entry of offshore gaming operators. 3 Primary Author: For further information, please contact:

Joey Roi Bondoc David A. Young Manager | Research | Philippines Chief Operating Officer | Philippines +632 858 9057 +632 858 9009 [email protected] [email protected]

Dom Fredrick Andaya Richard Raymundo Director | Office Services | Philippines Managing Director | Philippines +63 917 831 6725 +632 858 9028 [email protected] [email protected]

Donica Cuenca Research Analyst | Research | Philippines +632 858 9068 [email protected]

Martin Aguila Research Analyst | Research | Philippines +632 863 4116 [email protected]

About Colliers International Group Inc. Colliers International (NASDAQ, TSX: CIGI) is a leading global real estate services and investment management company. With operations in 68countries, our14,000 enterprising people work collaboratively to provide expert advice and services to maximize the value of property for real estate occupiers, owners and investors. For more than 20 years, our experienced leadership team, owning approximately 40% of our equity, have delivered industry-leading investment returns for shareholders. In 2018, corporate revenues were $2.8 billion ($3.3 billion including affiliates), with more than $26 billion of assets under management. For the latest news from Colliers, visit our website or follow us on

Copyright © 2019Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. COLLIERS QUARTERLY RESIDENTIAL | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

JOINT VENTURE PROJECTS THRIVE Joey Roi Bondoc Manager | Research | Philippines Residential joint venture condominium projects gain traction in Metro Manila +632 858 9057 [email protected]

2018–21 Summary & Q2 2019 Full Year 2019 Annual Average Recommendations > Colliers expects leasing to remain firm over the next three years as the entry of offshore Take up in both the pre-selling gaming firms in Quezon City and Ortigas and secondary condominium Demand Center should boost residential demand in 2,200 units 8,100 units 8,400 units markets in Metro Manila remains these areas. strong due to appreciation > Over the next three years, we expect Metro potential and a wider base of Manila’s condominium stock to reach buyers following the influx of 149,040 units. Fort Bonifacio and the Bay offshore gaming firms from Supply Area should be big contributors, accounting 2,600 units 9,200 units 10,100 units China. for 78% of new units in the metro area. With sustained demand for units Annual Average QOQ / YOY / Growth 2018–21 / that are both for sale or lease, End Q2 End 2019 End 2021 Colliers recommends that > Despite the completion of new projects, we developers: upgraded our 2019 rental growth forecast 0.5% 1.5% 1% > Continue joint ventures with from 1.0% to 1.5%. Colliers projects rental growth to decelerate gradually over the foreign firms Rent PHP730 PHP732 PHP740 subsequent two years. > Further diversify projects by > Colliers sees only a marginal rise in vacancy +0.2pp +0.1pp +0.4 pp offering affordable to mid- from 2019 to 2021 due to sustained leasing income projects, to tap a demand, especially in business hubs that wider base of residential end- Vacancy house outsourcing firms and offshore 10.6% 10.7% 11.8% users and investors gaming firms from China. > Target business districts such > The sustained take-up of condominium units as Quezon City and Ortigas in key business districts such as Rockwell 3.4% 10.9% 5.2% Centre, Makati CBD, and Fort Bonifacio Center that are likely to house Capital should fuel capital value increases in the offshore gaming firms. Values PHP202,000 PHP204,000 PHP214,000 next 24 to 36 months. Source: Colliers International. Note: USD1 to PHP51 as of the end Q2 2019. 1 sqm = 10.76 sqft. Demand represents completed condo units that are for lease or resale. Rent and capital values are per sq metre. COLLIERS QUARTERLY RESIDENTIAL | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

RECOMMENDATIONS STOCK OF NEARLY 150,000 BY 2021 More joint venture strategies In Q2 2019, Colliers recorded the completion of 2,600 units, bringing the total completion in H1 2019 to 6,300 units. As of H1 2019, Metro Manila's Colliers believes that developers should seize the opportunity provided by condominium stock stood at 125,150. We now project condominium stock the growing popularity of joint venture residential projects across Metro to reach 128,050 by the end of 2019, higher than our earlier forecast of Manila by firming up stronger partnerships with foreign developers and 126,620 as three projects in Fort Bonifacio, Eastwood, and Makati CBD were launching upscale and luxury projects. In our opinion, local players should completed ahead of schedule. highlight their partnerships with Japanese firms known for their technological innovation. Local developers should also emphasize the The joint venture projects between foreign and Philippine firms are among projects’ upscale amenities, integrated development, and potential for the more expensive in the market, with the total contract price (TCP) per capital appreciation, which are all important to discerning buyers. unit ranging from PHP7.6 million (USD149,000) to PHP31 million (USD607,800). Despite being classified as upscale and luxury, these projects Further diversification of projects have an average take up rate of nearly 90% as of H2 2019. Existing joint venture projects tend to be luxury projects, with an average Aside from the capital appreciation potential, investors and end-users are total contract price (TCP) of PHP16 million (USD313,700) per unit. While enticed by upscale facilities, innovative concierge services, and the demand for this segment remains firm, Colliers encourages developers to advantage of being in a master planned development. We see strong take up launch affordable and mid-income projects with TCPs ranging from from similar projects in Metro Manila being sustained over the next three PHP1.7 million to PHP6 million (USD33,300 to USD117,600) to capture the years and thus project more aggressive launches from both local and foreign greater depth of this market segment. We recommend developing more developers. affordable projects in the fringe areas, including the Northern and Southern part of Quezon City and Manila. Meanwhile, mid-income units Colliers sees Fort Bonifacio and Bay Area covering nearly 80% of new supply are more popular in the Bay Area and fringes of Ortigas. We recommend from 2019 to 2021. In our opinion, this complements the pace of office that developers further validate the attractiveness of these areas for development in these two business districts as we see them covering a third these price segments and test if the target markets are ready for higher- of new office space due to be completed during the period. priced units. Target new business hubs likely to house offshore gaming LEASING REMAINS FIRM The expansion of offshore gaming operations from China has had positive The completion of additional units across Metro Manila in Q2 2019 resulted impact on Philippine property. Aside from offices, these firms look for in a higher overall vacancy of 10.6% from 10.4% in Q1 2019. From 2019 to condominium projects to house their employees, resulting in an 2020 we see Metro Manila posting a vacancy of 11% per annum due to the acceleration of take up and prices in Makati CBD, Fort Bonifacio and the significant number of new projects in the pipeline. However, we see leasing Bay Area. We encourage developers to look for opportunities in business activities remaining firm in sub-markets housing offshore gaming firms such districts likely to house these firms, especially Quezon City and Ortigas as the Bay Area, Ortigas Center, Makati CBD and their fringes. Center.

2 COLLIERS QUARTERLY RESIDENTIAL | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

Metro Manila residential stock forecast, end 2019 and 2021 (units) Annual capital value growth of selected submarkets, 2019 to 2021

7 8 5 1 6 Location End of 2019 End of 2021 % change 5.6% 4 1 Bay Area 22,430 34,820 55.2% 6.0% Rockwell Center 2 Alabang 4,430 5,380 21.4% 3 3 Fort Bonifacio 35,580 40,940 15.1% Makati CBD 6.0% 4 Rockwell Center 5,270 5,810 10.2% 5 Ortigas Center 18,740 19,580 4.5% Fort Bonifacio 6 Makati CBD 27,880 28,790 3.3% 7 Araneta Center 4,550 4,550 0.0% 8 Eastwood City 9,170 9,170 0.0% 2 Total 128,050 149,040 16.4%

Source: Colliers International Source: Colliers International Note: ¹ Prices reflect prime, three bedroom units MODEST RENTAL GROWTH JOINT VENTURES ON THE RISE Average rents in prime three-bedroom units in Makati CBD, Fort Bonifacioand Rockwell Center rose by 0.4% QOQ. For overall Metro Among the major foreign firms that either established or expanded their Manila, we expect rents to increase by 0.9% annually from 2019 to 2021, footprints in the country by launching projects with local players are Hankyu close to our Q1 2019 forecast of 0.8%. We still see sustained rental growth Realty Co., Ltd., Mitsui Fudosan and Nomura Real Estate Development Co.. especially in business districts housing offshore gaming operators from Mitsubishi, which previously partnered with Ayala Land for the development China. of industrial parks in Southern Luzon, has a partnership with Alveo for a residential project in the eastern part of Metro Manila. Meanwhile, Hong Kong Land and Robinsons Land Corporation (RLC) have announced plans to PRICES CONTINUE TO INCREASE develop a residential property in Pasig City. Capital values continue to increase with average prices of prime three- Colliers believes that local and foreign companies mutually benefit from these bedroom units in the secondary market in Makati CBD, Rockwell Center, joint venture projects. While foreign firms are enticed by high yields derived and Fort Bonifacio ranging between PHP145,000 and PHP362,000 from Philippine projects, local developers gain by being vouched for by (USD2,800 and USD7,100) per sqmetreas of Q2 2019, increasing by an prominent foreign brands. Japanese brands are particularly known for their average of 3.7% QOQ. For overall Metro Manila, we expect prices to precision and high architectural and engineering standards, making their increase by an annual average of 5.2% from 2019 to 2021, slower than our condominium projects an attractive option for local investors. initial forecast of 6% as we factor in the new supply. 3 Primary Authors: For further information, please contact:

Joey Roi Bondoc David A. Young Manager | Research | Philippines Chief Operating Officer | Philippines +632 858 9057 +632 858 9009 [email protected] [email protected]

Richard Raymundo Managing Director | Philippines +632 858 9028 [email protected]

Donica Cuenca Research Analyst | Research | Philippines +632 858 9068 [email protected]

Martin Aguila Research Analyst | Research | Philippines +632 863 4116 [email protected]

Copyright © 2019Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. COLLIERS SEMI-ANNUAL HOTEL | MANILA | RESEARCH | H1 2019 | 09 AUGUST 2019

Joey Roi Bondoc CHINESE TO DRIVE OCCUPANCY Manager | Research | Philippines +632 858 9057 Philippine hotel developers and operators respond to rising Chinese arrivals [email protected]

2018–22 Summary & H1 2019 Full Year 2019 Annual Average Recommendations > Colliers projects stable demand for three- and four-star hotels from South Korean, Colliers expects foreign arrivals to Chinese, and Japanese tourists. We see reach 8.3 million in 2019, within arrivals rising by 15% per year from 2019 to Demand 3.5 million 8.3 million 10.2 million the government’s target. Chinese 2022, in line with the government’s forecast. tourists are a major driver of hotel occupancy and spending. Colliers > From 2019 to 2022, we expect 10,000 new recommends that hotel rooms to complete. Annual new supply is developers take advantage of the likely to peak in 2020, followed by a gradual rising number of foreign tourists Supply decline from 2021 to 2022. 507 rooms 2,700 rooms 2,500 rooms by implementing the following: > Construct more three- and four-star hotels Annual Average HOH/ YOY/ Growth 2018–22/ > Develop more hotels near End H1 End 2019 End 2022 airport modernization projects > We project a 70% occupancy from 2019 to 3% 2% 0% > Monitor the rise in new direct 2022 as the continued rise in foreign tourists flights by Philippine and should sustain occupancy despite the Chinese airlines Occupancy delivery of new hotel rooms. 71% 70% 70% > Establish mobile payment at in-hotel retail outlets > Colliers sees Manila’s average daily rates Colliers also encourages rising by an average of 3% per year from 3% 4% 3% 2019 to 2022. The increase is likely to peak developers to use the proceeds in 2019 at 4% but slow down gradually as Room Rates USD85 from divesting other commercial additional rooms are completed from 2020 USD77 USD78 assets into REITs to build their to 2022. hospitality portfolios Source: Colliers International Note: USD1 to PHP51 as of the end of Q2 2019. Demand is tourist arrivals. COLLIERS SEMI-ANNUAL HOTEL | MANILA | RESEARCH | H1 2019 | 09 AUGUST 2019

RECOMMENDATIONS Chinese visitors have been driving hotel occupancy international brands or broaden homegrown ones. Colliers believes that the completion and modernization of airports throughout the country would and tourist spending across the country. To take add to the attractiveness of hospitality REITs, with the sector being a advantage of the opportunities, we encourage major beneficiary of the government’s drive to improve air transport developers and operators to: infrastructure throughout the country. Build more three-and four-star hotels ARRIVALS UP, WITHIN TARGET In our opinion, developers should consider building more three- and four- Latest data from the Department of Tourism (DOT) showed that foreign start hotels to cater to the country’s major tourist groups such as Chinese, tourist arrivals from January to May 2019 grew by 9.8% to 3.5 million from Japanese, and Koreans. In our opinion, Quezon City remains a viable location 3.2 million during the same period in 2018. South Korea remains as due to the lack of quality accommodation in the area. Philippines’ top source market, with 788,530 arrivals. Meanwhile, tourists Pursue hotel development near airport projects from China grew by 31% to 733,769. Other major source of arrivals during the period include the United States, Japan, Taiwan, Australia, Canada, Colliers encourages developers to be on the lookout for airports either being United Kingdom, Singapore and Malaysia. In 2019, we see foreign arrivals built or expanded by the government. Among the feasible locations due to rising by 15% to 8.3 million, slightly ahead of the government’s target of 8.2 ongoing airport projects are Clark in Pampanga, Cavite, and Davao. Colliers million. has observed that Chinese tourists have been driving the Cebu leisure market following the expansion of the city’s airport in 2018. HOTEL OCCUPANCY AT 71% Monitor the increase in direct flights by Philippine and Chinese airlines Overall hotel occupancy in Metro Manila reached 71% for the first half of 2019 despite the delivery of 507 new rooms. The occupancy is higher than Philippine and Chinese airlines have been actively increasing direct flights the 68% posted in H2 2018. The higher occupancy in H1 2019 is partly between the two countries. We recommend that hotel developers and attributable to sustained demand for three-and four-star hotels, which operators constantly monitor these agreements to better capture the recorded occupancies of 69% and 65% respectively in H1 2019 from 65% and demand from the growing Chinese market. 60% in the same period in 2018. Implement mobile payments at in-hotel retail outlets Colliers sees hotel occupancy tapering off just slightly 70% in 2019 as we Mobile payment schemes such as PayMaya and WeChat Pay are popular expect the completion of about 2,200 new rooms in Metro Manila in H2 among Chinse travellers. Colliers recommends that hotel lobby retailers 2019. implement mobile and cashless payment systems that are particularly We see an average occupancy of 70% from 2020 to 2022 as the substantial popular among Chinese tourists. rise in hotel supply is likely to be absorbed by the growth of foreign arrivals Tap REITs to bring in foreign brands or develop homegrown ones in the country. This growth should be supported by the tourism department’s aggressive international marketing efforts and the Colliers sees hotel REITs being an attractive option for developers. Colliers government’s efforts to expand and modernize more airports across the believes that REIT proceeds can be used by developers to either acquire country. 2 COLLIERS SEMI-ANNUAL HOTEL | MANILA | RESEARCH | H1 2019 | 09 AUGUST 2019

building more three to four-star hotels. Firms like DoubleDragon(DD), have Chinese tourist arrivals in the Philippines from 2010-2018 been encouraged by the influx of Chinese tourists to build more Hotel 101 and Jinjiang brand hotels across the country. The latter is popular among Chinese tourists and business executives given its brand recognition and 2010 2011 2012 2013 convenient booking platform. 187,446 243,137 250,883 426,352 Colliers recorded the opening of about 500 new hotel rooms in H1 2019. Among the new hotels completed during the period were the 142 out of the 342-room Seda Hotel BGC Tower 2 and the 105 out of the 293-room Seda China Residences Ayala North Exchange in Makati CBD; Megaworld’s 93-room Hotel 2014 2015 2016 Lucky Chinatown in Binondo; and The ErawanGroup’s 167-room Hop Inn 394,951 490,841 675,663 Tomas Morato in Quezon City. Aside from the Chinese visitors, demand for these hotels is also propelled by Philippines the country’s rising tourist arrivals such as South Korea, Japan and Taiwan, which together with China account for 60% of the Philippines’ total arrivals. 2017 From 2019 to 2022, Colliers sees an aggressive completion of homegrown 966,198 2018 1,252,386 brands by national developers. These include Ayala Land’s Seda hotel in the Bay Area, DD’s Hotel 101 in Fort Bonifacio, Ibis Styles Hotel in Araneta Center Source: Department of Tourism and Rockwell’s Aruga Hotel Makati. RISING CHINESE MARKET About 40% of the 10,000 new hotel rooms due to be completed from 2019 to 2022 are classified as three-star while about 35% are four-and five-star In our opinion, a key contributor to rising hotel occupancy and tourist hotels. Colliers expects the annual completion of about 2,500 new units per spending in the country is the rising number of Chinese arrivals. We believe year from 2019 to 2022. that rising disposable incomes, relaxed visa rules, and aggressive promotions of low-cost flights are encouraging more tourists to travel outside of Mainland Hotel Supply forecast (2019-2022) China. According to the China National Tourism Administration (CNTA), China’s outbound tourists totaled 149 million in 2018. Outbound tourists spent a total % to total of USD120 billion (PHP6.1 trillion), an average of USD859 (PHP43,800) per Location Hotel Rooms new supply person. 1 Bay Area 3,658 36% 2 Quezon City 2 Quezon City 2,266 23% Manila 10 In contrast, the Philippines attracted only 1.2 million Chinese tourists in 2018. 3 Fort Bonifacio 1,318 13% Ortigas CBD Ortigas Fringe While this is higher than the 970,000 Chinese that visited the Philippines in 4 Makati CBD 1,177 12% 6 5 5 Ortigas Fringe 310 3% Makati Fringe 2017 and the less than half a million recorded in 2015 (prior to President Bay Area 1 4 7 6 Ortigas CBD 303 3% 9 Duterte’s assumption of office), the 2018 arrivals represent a mere 0.8% of 3 Fort Bonifacio total outbound Chinese tourists. In 2017, a Chinese tourist in the Philippines 7 Makati Fringe 280 3% Newport City Taguig 265 3% 8 Taguig spent an average of USD233 (PHP11,900), only a quarter of an average Chinese 8 Makati CBD Newport City 191 2% tourist’s spending elsewhere. 9 Others 186 2% Developers have been responding to the growing arrivals from China by 10 Manila 93 <1% Total 10,047 3 Source:: Colliers International Primary Author: For further information, please contact:

Joey Roi Bondoc David A. Young Manager | Research | Philippines Chief Operating Officer | Philippines +632 858 9057 +632 858 9009 [email protected] [email protected]

Richard Raymundo Managing Director | Philippines +632 858 9028 [email protected]

Donica Cuenca Analyst | Research | Philippines +632 858 9068 [email protected]

Martin Aguila Analyst | Research | Philippines +632 863 4116 [email protected]

Copyright © 2019Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. COLLIERS SEMI-ANNUAL INDUSTRIAL | MANILA | RESEARCH | H1 2019 | 09 AUGUST 2019

Joey Roi Bondoc THE DRAGON ENTERS INDUSTRIAL Manager | Research | Philippines +632 858 9057 Industrial developers to maximize influx of Chinese manufacturing investments [email protected]

2018–21 Summary & H1 2019 Full Year 2019 Annual Average Recommendations > Colliers expects electronics and semiconductor investments to occupy The impact of Chinese investors industrial space and warehouses in the on Philippine property has spilled Demand Cavite-Laguna-Batangas (CALABA) region 16 ha 48 ha 48 ha over to the industrial segment. from 2019 to 2021. The rising interest from Chinese manufacturers has compelled > We forecast limited increase in stock in CALABA from 2019 to 2021. More than half firms to build more warehouses of new industrial space is likely to be n/a and develop the country’s first Supply developed in Batangas. 50 ha 50 ha Philippine-Sino industrial park.

Given the industrial trends, Annual Average Colliers recommends that HOH / YOY / Growth 2018–21 / developers – End H1 End 2019 End 2021 > Stable industrial land supply coupled with > Modernize warehouses 3.0% 3.5% 3.5% rising demand should sustain a healthy > Develop industrial space annual increase in industrial land leasehold and standard factory building (SFB) rates within new townships Rent PHP80 PHP81 PHP86 from 2019 to 2021. > Align industrial developments > We see land leasehold vacancy in the CALABA with the government’s -0.4pp -1.0pp 0.0pp infrastructure program region at 5% from 2019 to 2021 as manufacturing investments committed in H2 Colliers encourages food and Vacancy 2018 and H1 2019 materialize and absorb the 5.6% 5.0% 5.0% beverage (F&B) and packaging marginal rise in supply.

manufacturers to continue Source: Colliers International. Note: USD1 to PHP51 as of the end of Q2. 1 sqm = 10.76 sqft; pp = percentage point. Data in the table above represents land leasehold looking for space in the Northern- rates. Central Luzon corridor. COLLIERS SEMI-ANNUAL INDUSTRIAL | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

RECOMMENDATIONS STABLE INDUSTRIAL OCCUPANCY Colliers believes that developers should cash in on Despite uncertainty brought about by the government’s proposal to eliminate incentives given to industrial occupiers, committed foreign greater activity from foreign manufacturers, investments nearly tripled in Q1 2019 to PHP46 billion (USD902 million) particularly Chinese, by undertaking the following – from PHP14.2 billion (USD278 million) in the same period in 2018, according to the latest data from the PSA. Modernize warehouses Manufacturing investments, which accounted for 76% of all foreign pledges, We recommend that developers expand their footprint in the industrial reached PHP35 billion (USD686 million) from only PHP9.1 billion (USD178 segment by building modern warehouses. Colliers projects demand for million) in Q1 2018, representing a 285% increase YOY. Meanwhile, industrial warehouses to rise over the next 12 to 36 months due to the transportation and storage investment pledges dropped to PHP44.1 million country’s thriving e-commerce market and as manufacturing investments (USD864,700) from PHP391 million (USD7.7 million) a year ago. The drop is pledged in the past six to 12 months translate into space requirements. likely due to the high base effect, with investments into the sector reaching Develop industrial space within townships PHP3.8 billion (USD74.5 million) in 2018. We expect investments into the sector to pick up in the next two to three years as foreign and local Aside from the typical office, residential, and retail projects, property players companies continue to build and modernize warehouses to cash in on the should also consider developing industrial space and warehouses within new rising demand from e-commerce. integrated communities being developed north of Manila. In our opinion, examples of integrated communities with highly viable industrial parks are According to the PSA, the bulk of the manufacturing commitments are Ayala Land’s Alviera in Porac, Pampanga and Filinvest’s industrial project in expected to be funneled into Northern-Central Luzon (covering the New Clark City in Capas, Tarlac. We see both projects benefitting from the provinces of Pampanga, Tarlac, and Bataan) and Southern Luzon (including expansion of Clark International Airport and construction of Clark passenger the Cavite-Laguna-Batangas region, the country’s primary industrial hub) and cargo rail systems. regions. Monitor committed investments registered with investment promotion agencies EXISTING OCCUPIERS EXPAND Colliers encourages industrial space developers to focus on the demand of In Cavite industrial parks, existing Japanese and Korean manufacturers of industrial tenants based on location. According to data from the Philippine electronics, earphones, and printed circuit boards are among the companies Economic Zone Authority (PEZA) and Philippine Statistics Authority (PSA), that we see occupying industrial space over the next 12 to 24 months. most electronics and semiconductor investments still gravitate towards the Warehouses and logistics support services are likely to be provided by CALABA region while light manufacturing facilities such as food and Filipino and Japanese investors. beverage (F&B) and packaging materials factories are located in the Data from PEZA reveal that among the firms planning to expand existing industrial facilities located north of Metro Manila. operations in Laguna industrial parks are those in the manufacturing of safety switches, semiconductors, and packaging materials. Several Japanese firms have also committed to build warehouses.

2 COLLIERS SEMI-ANNUAL INDUSTRIAL | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019

In Batangas we see industrial space absorption from 2019 to 2021 being sustained by existing electronics manufacturers. MORE CHINESE INVESTMENTS Colliers projects overall vacancy in the CALABA region to hover around 5.0% Data from the central bank show that from 2013 to 2015, foreign direct from 2019 to 2021. Some electronics and semi-conductor firms’ expansion investment (FDI) from China averaged USD16 million (PHP861 million) per plans should further boost industrial space absorption in the region during year. This has risen to an annual average of USD70 million (PHP3.6 billion) the period. The take-up should be complemented by the development of from 2016 to 2018. additional warehouses in the corridor’s industrial parks. Colliers believes that the upward trajectory in FDI inflows from China is likely From 2019 to 2021, Colliers expects lease rates for warehouses to grow at to be sustained over the next three years, especially in light of the 4.0% per annum, faster than the 3.5% growth in land leasehold rates. Our deepening relationship between the Philippine and Chinese governments. A forecast for warehouse lease rates has been upgraded slightly from our Q4 number of industrial park development deals have also been signed by the 2018 forecast of 3.5%. Colliers sees developers maximizing opportunities to two countries over the past eight months. In our opinion, this is in build more warehouses in the CALABA region, the Philippines’ major preparation ahead of our projected influx of large space-absorbing industrial hub. The sustained demand from high-value manufacturers investments from China. Colliers expects developers to aggressively cater to coupled with limited new industrial supply (150 has or 371 acres from 2019- Chinese manufacturers’ requirements from 2019 to 2021. In our opinion, 2021) should limit industrial vacancy in the region to only 5.0% per annum Ayala Land is likely to seize the first-mover advantage by the developing the over the next three years. country’s first Philippine-Sino industrial park in Northern-Central Luzon.

Profile of incoming manufacturing occupiers and vacancy Upcoming industrial supply, 2019 to 2021 (in hectares)

North-Central Luzon Industrial lease rates (PHP per sq m) Packaging Growth CALABA H2 2018 H1 2019 (HOH) Food and Beverage Leasehold (Land) 78 80 3.0% Warehouses North-Central Luzon Lease Rates (SFB*) 263 274 4.0% Upcoming Industrial Supply (2019-2021) CALABA (Cavite-Laguna-Batangas) Semiconductors 300 ha Electronics Manila Manila Warehouses CALABA Region IV-A H2 2018 H1 2019 (Cavite-Laguna-Batangas) Cavite 6.0% 5.7% 150 ha Upcoming Industrial Supply 4.5% 4.3% Laguna (2019-2021) Batangas 7.0% 6.5% Average 6.0% 5.6% Source: Colliers International Source: Colliers International * Standard Factory Building 3 Primary Authors: For further information, please contact:

Joey Roi Bondoc David A. Young Manager | Research | Philippines Chief Operating Officer | Philippines +632 858 9057 +632 858 9009 [email protected] [email protected]

Richard Raymundo Managing Director | Philippines +632 858 9028 [email protected]

Donica Cuenca Research Analyst | Research | Philippines +632 858 9068 [email protected]

Martin Aguila Research Analyst | Research | Philippines +632 863 4116 [email protected]